What the Current Markets Are and Are Not Telling Us

Welcome to Mentor Mondays! Today we welcome Techstars mentor, Seth Levine. Seth is a Boulder, CO based technology investor and managing director at Foundry Group. 

In response to a comment to my earlier post about the Profit Imperative, I rattled off some ideas about the current state of the markets. I thought it was worth sharing as a full post (I’ve edited and expanded on the original comment).

There are clearly headwinds in the markets – I’m not at all suggesting that there aren’t. And we may be in a period of strong negative pricing pressure in both the public and private markets. As you know, markets tend to perpetuate themselves and pendulum. This cycle of overreacting is how business and market cycles seem to work. Without a doubt we’re in an environment of increasing volatility and that volatility alone may spook some investors.  

Price shifts at the top of the market, starting with the public markets and quickly spreading to the public market investors who had been dipping into the late stage private markets and continuing from there, will and are clearly changing pricing across all stages of private market financings.

I’m generally of the view that we’re not in a bubble (see my post on that from last September here). While there’s no functional definition of an asset “bubble” that people seem to agree on, let’s at least agree that they’re caused by a fundamental imbalance between the actual “value” of an asset and the way the markets are pricing that asset. We saw this clearly in the housing market when the access to cheap capital created run-away housing prices that weren’t sustainable by any historical measure of actual underlying value. We’ve certainly seen this in the public and private markets as well (for example in the 2000 crash where truly unsustainable levels of funding were driving too many bad ideas into the market and the perception of market value and future growth and profit potential was completely out of balance with reality).

I’d differentiate this from what we saw in 2008 in the private markets where prices contracted – in some cases relatively dramatically – but where there wasn’t a true bubble bursting in the way we saw in 2001. The private markets in that case were reacting to the larger trends in the public markets (the US consumer was in a painful process of shedding debt and readjusting their balance sheets after the housing bubble broke) and to a supply and demand change in the availability of capital. That so many great companies were started in this period perhaps suggests that the venture capital markets over reacted to what was taking place in the public markets (and that’s just one measure of the over-reaction). 

When I look at the fundamental value of public comps, we’re already well below historical averages (and weren’t even at the top of those averages when the markets started correcting). When I see the drastic proclamations of arageddon I think they’re unjustified by the current actual market conditions.

When I look at the US economic data I don’t see anything justifying the wide sell-off in the market. When I see companies announce 1-time tax hits and drop 40% of their value overnight, I see a market that’s overreacting.

There is clearly plenty of negative sentiment in the marketplace and this sentiment tends to be self fulfilling – we will see a contraction at Series A and (especially in my mind) at Series B. Capital will retreat, companies will have a harder time raising money and pricing will adjust (however to be clear, the rise of seed rounds in the past year is nothing like the overfunding of Series A and B that we saw in 99′ – and some might argue is good for the overall ecosystem as more ideas get enough legs to test whether they have merit and those that do go on to raise their A rounds).

This is a bit of an oversimplification but to some extent we live in a bifurcated world. There’s a big difference in market behavior at the high end of the markets where there has been a “bubble” around so called unicorn companies who were chasing that billion dollar valuation. This led to aggressive valuations, to aggressive terms and to aggressive expectations on growth that I think are about to come home to roost in that market segment. But to be clear, I thought this long ago and well before the public markets started reacting. 

Which all leads me back to my most important business mantra:

1) don’t panic

2) gather information

3) make informed decisions

As always, the order here matters a lot.


See the original post here

Don’t Be Afraid of Maps

I’ve spent a bunch of time with a handful of the Techstars teams in the last few weeks. The first week of Techstars was a complete whirlwind (lots of new people to meet, presentations from a bunch of big tech vendors, learning the lay of the land in Boulder, etc). Now the teams have caught their collective breath and are starting to realize just how quickly the summer rolls by when you’re creating and building a business.

While it’s fun to run and gun during the early stages of business formation, I’ve always been insistent that the teams that I work closely with map out their work for the summer early on. It’s not something that’s set in stone but is a good guide of where we think we can get to in a 12 week period. These roadmaps get modified on a regular basis throughout the summer but the overall framework generally remains the same (in part because each team is striving to make discernable and demonstrative progress by the final “pitch” day at the end of the program).

I’ve been around plenty of start-up businesses. Some have been more methodical than others at planning out where they were going and what they were doing; at collecting data early on in their dev process from prospective users and working that into their product thoughts; at working their dev cycles to allow key issues to be surfaced earlier rather than later; at thinking through scale before their first users hit their system; etc. Others, not so much. I bet you can guess which ones have the higher success rate…

Finding Your Technical Co-Founder

I hear a version of this question a lot (like the one below today from Dawn):

I talked to a firm that really likes my business plan but thinks I should have a technical co-founder. SIGH Any ideas how I could find a really good tech guy, preferably with some cache???

While not every business needs a technical co-founder, many (most) benefit from some early technical vision that is unlikely to be provided by the business founder. So where do you find these people that can code, help refine your technical vision and check the technical cache box? Here are a couple of ideas.

Surf your sandbox. You know people. They know people. If you can’t think of someone who fits the bill from your own network, start asking around to other people you trust. Particularly other technologists who will have a good sense for whether someone they might recommend has the technical chops to really help you out. Many a great business/technical founder marriage has been made by a well intentioned third party.

Pay attention to the local scene. Technical talent hangs out at various places in your town. You need to find them (since they are less likely to find you). If you are lucky enough to have a New Tech Meetup in your area or Bar Camp, StartupWeekend or Open Coffee Club or some similar semi-organized event that attracts technologists and entrepreneurs alike make sure you frequent them and talk up your ideas. You’re looking for someone who not only can add to your project, but who also shares your enthusiasm. If your town doesn’t have any of these – start one. You’d be amaze at how quickly people will come out of the ether to share ideas at events like the ones listed above.

Be vocal. My recent “stealth or not” post aside, if you’re looking to find someone to share in the passion of your idea you need to be talking it up. On your blog. In comments to other peoples’ posts. In web forums. Maybe even on Craig’s List. Don’t be shy about sharing your idea and asking for help. I know a bunch of co-founders who found each other on message boards or in similar forums.

Check your mentors. This is really an extension of surfing your sandbox, but you shouldn’t be shy about asking around for help. Bother the local VC bloggers, ask the people that are helping you get off the ground if they know anyone. Be aggressive about asking people who might have good ideas for help.

Good luck! I’d love to hear from teams that met in the ways described above (or in any other way for that matter) – founder stories are always entertaining.